ECB leaves interest rates on hold (1st Lead)

Luxembourg - The European Central Bank left interest rates on hold at a record low of one per cent Thursday as it sizes up the economic fallout from the global recession. Meeting in Luxembourg at one of its regular out-of-town sessions, the Frankfurt-based ECB's decision to leave rates in the 16-member eurozone unchanged for the second consecutive month was in line with analysts forecasts. Moreover, many analysts believe that borrowing costs in the currency bloc could be on hold well into 2010 as growth in the eurozone economy struggles to gain traction following the world's biggest economic crisis in more than six decades. The ECB announcement on rates came despite the release of data ahead of the meeting showing eurozone unemployment climbing and inflation tumbling to below zero for the first time since the currency bloc was forged a decade ago. This in turn has helped to stoke fears about the threat of deflation. Consumer prices slipped by 0.1 per cent in June compared to the same month in 2008, the European Union's statistics office, Eurostat said Wednesday. This took inflation well below the ECB's annual target of close to but below two per cent and came in the wake of the eurozone economy shrinking by 4.8 per cent year-on-year during the first three months of the year. The buildup to Thursday's ECB meeting follows a steady stream of forward-looking economic sentiment surveys pointing to expectations of a turnaround in the European economy as the year unfolds. Economic confidence in Europe rose more than expected in June to reach its highest reading in seven months, a key European Commission report released Monday. Despite tentative signs that the recession might be loosening its grip on Europe, the Swedish central bank, the Riksbank announced ahead of the ECB meeting Thursday that it was cutting interest rates to 0.25 per cent. Sweden is not a member of euro currency bloc. As a result, the market focus is likely to be on ECB chief Jean- Claude Trichet's press conference set down later Thursday for indications as to whether it believes a more positive economic picture is starting to emerge. In his press conference, Trichet might also provide more details at his press conference of the ECB's plans to help spur economic growth by buying up to 60 billion euros (84 billion dollars) of covered bonds, which he outlined a month ago. But analysts believe Trichet is likely to insist that it is too early to say what impact the ECB's move last week to inject a massive 442 billion euros of liquidity into the banking system has had on shoring up financial market confidence. However, since the ECB's meeting four weeks ago the bleak eurozone economic data has continued to roll in with factory order books, as well as production, shrinking, exports slumping and unemployment on the rise. The numbers out of work in the eurozone jumped more than than forecast in May to reach its highest level in more than a decade, the European Union's (EU) statistics office said Thursday. The May increase pushed seasonally adjusted unemployment up by 273,000 to 9.5 per cent compared with a 9.3 per cent in April amid concerns that the lay-offs will surge by the end of the year as the recession catches up with the labour market.